CHICAGO, Ill. — On August 18 Allendale, Inc. reported the CME Group lowered its margin requirements for soybeans and wheat. The requirement for soybeans went from $2,100 to $1,900 per contract and the wheat requirement was lowered from $1,400 to $1,200.

 

“We do adjust margins at times based on volatility; we don’t adjust margins based on absolute prices,” said ChrisGrams, a spokesman for CME. “We’re not decreasing margins because prices have decreased or increasing margins because prices have increased. We don’t adjust margins based on prices.”

He explained margin requirements are based on price volatility – specifically, 20-day historic volatility, intraday volatility and interday, or day-to-day, volatility.

“They look at all three of these metrics when considering whether to enact margin changes.”

When an investor buys a futures contract, they don’t have to pay the full price for the commodity that the contract represents, but a certain amount is required upfront and a certain amount is required to maintain the position.

According to an Open Markets blog post from May 4, 2011, CME Clearing, a division of CME Group, determines “initial margin,” or the amount that market participants must pay when they initiate a position. Participants must also maintain a “maintenance margin,” the minimum level at which a margin must be maintained over time.

“We mark positions to market twice a day to prevent losses from accumulating over time,” the post stated. “We typically change margins after a market closes because we have a full view of the market liquidity of that trading day. And, we also provide at least 24 hours notice of margin changes to give market participants time to assess the impact on their position and make arrangements for funding.”

In another Open Markets post, this one from July 13, 2012, the fact that agricultural commodities are uniquely dependent on the weather is discussed.

Supplies of a given commodity can be profoundly affected by weather conditions, the post says, yet “supply is often difficult or impossible to adjust to meet changes in demand.” As such, price expectations often come to depend on historical price movements.

Another unique aspect of ag commodities is that the USDA issues multiple reports discussing both supply and demand, which can also affect price volatility of commodities.

According to information from CME, examples of futures contracts include soybean meal futures, which for the period beginning in August and ending in September 2018 required a $1,600 maintenance margin. Soybean oil futures with a start date of August and end date of September had a maintenance requirement of $725.

 

Rough rice futures with a start date of this September and end date of September 2018 had a maintenance requirement of $825. Bloomberg Commodity Index Futures beginning in September and ending in December 2021 had a maintenance requirement of $200.

These and many other agricultural investment products can be viewed at www.cmegroup.com